Selling Your Business

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How to Close a Small Business

Are you looking to close your small business? Here are a few tips to get you through the process as painlessly as possible.

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The Importance of Buy-Sell Agreements

Everything you need to know about maintaining a buy-sell agreement for your business.

Find New Customers Online--Go International!

Looking for ways to increase your sales while the economy plods along the path to recovery? Why not expand your target market by opening your business to the world?

Closing the Business Sale

In the context of the sale of a business, the "closing" is the point in time at which all necessary documents are signed by all the parties, apportionment of expenses up to the date of closing is done, money and keys are exchanged, and the buyer becomes the new owner of the business.

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After the Sale: What Now?

After the sale of your business is completed, the first thing you should probably do is take a well-deserved vacation!

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State Laws on Business Sales

State laws can impose a variety of obligations on both the seller and buyer of a business. Our purpose here is to alert you to some of the implications of the most common requirements. For more detailed information on the requirements in your state, consult your attorney.

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Due Diligence

Usually, after a buyer signs a letter of intent to purchase a business and the seller accepts the letter, the buyer will have a specified period of time in which to conduct a due diligence investigation of the seller and the company. During this period, your buyer should have access to your financial and other records, facilities, employees, etc., to investigate before finalizing the deal.

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Letter of Intent

Once you have a general agreement with the buyer as to the price and terms of the sale of your business, the buyer usually drafts and signs a non-binding letter of intent. The letter of intent lays out the general terms of the deal, and, if signed by the seller, it indicates that both parties intend to move forward in completing the transaction. Generally, at the time the buyer submits the letter he or she will also make a monetary deposit on the purchase price, similar to the earnest money used in a real estate deal. If the deposit is large, the seller may agree to a "no-shop" agreement, which prevents the seller from further marketing the company. However, the letter is usually nonbinding in the sense that at any point, negotiations can be broken off by either party, and the buyer's deposit will be returned.

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Business Purchase Agreement

The purchase agreement for your business is one of the most important legal documents you'll ever sign. After all, many years of hard work will culminate in this single transaction, by which you'll put a dollar sign on the value of your entire operation. You don't want to have problems collecting the money due you or to have legal problems haunting you into the future, and a carefully constructed purchase agreement can be your best insurance policy for preventing such catastrophes.

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Financing the Business Sale

Early on in the negotiation process, you'll need to determine where the buyer is going to get the money to purchase your business.

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Negotiating the Price

Once you've established what the major terms of your deal are going to be, you can begin to negotiate on what's probably the most important aspect of the sale of your business: the price.

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Steps to Completing the Sale

Once you've located a buyer for your company and come to an agreement as to the major terms and price, you are ready to move into the process of actually closing the deal.

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Seller Financing

Should you finance a buyer who is purchasing your business?

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Outside Lenders/LBOs

When an outside lender such as a bank or investment firm finances the purchase of a business, the transaction is frequently called a leveraged buy out or LBO. LBOs were once very common, but many lenders have been stung as buyers tended to default when things got tough, or had such difficulty making payments that lenders were forced to restructure the loans. Lending criteria are stricter, now, and buyers are expected to put up more of their own money (or find a partner who's willing to).

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Seller's Noncompete Agreements

One of the last things that a buyer wants to happen is for you to sell your company, and then turn around and start another one just up the street, taking most of your customers with you. For that reason, buyers will want you to sign a noncompete agreement as part of the deal. The agreement will state that in exchange for a specified payment, you promise not to go into a similar type of business, within a certain geographic area, for a given period of time. Sometimes the agreement will specify that you promise not to use certain confidential trade secrets, business processes, customer lists, etc. that you are transferring to the buyer.

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Tax Aspects of Selling Out

When you sell your business you're likely to face a significant tax bill. In fact, if you're not careful, you can wind up with less than half of the purchase price in your pocket, after all taxes are paid! However, with skillful planning it's possible to minimize or defer at least some of these taxes.

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Capital Gains/Ordinary Income

When you sell your business, you are really selling a collection of assets, some tangible (such as real estate, machinery, inventory) and some intangible (such as goodwill, accounts receivable, a trade name). Unless your business is incorporated and you are selling the stock, the purchase price must be allocated among the assets that are being transferred. According to IRS rules, the buyer and seller must use the same allocation, so the allocation will have to be negotiated and put in writing as part of the sales contract.

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Installment Sales

If you are willing to finance the sale of your business by taking back a mortgage or note for part of the purchase price, you might be able to report some of your capital gains on the installment method. This is good news, because the method allows you to defer some of the tax due on the sale until you get paid over the course of future years.

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Tax-Free Reorganizations

If your business is incorporated and you are selling out to a larger corporation, it may be possible to defer any tax due on the sale. How? By structuring the sale as a corporate reorganization, and accepting the purchaser's stock in exchange for your own business's stock. If you manage to comply with the IRS's extensive rules for these types of transactions, you won't be taxed on the value of the stock you receive, until you sell it at some point down the road. If you receive other property or tax in addition, however, you'll have to recognize taxable gain to the extent of this "boot."

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Tax on Stock or Asset Sales

If your business is organized as a corporation, you have a choice: you can either sell the stock in the corporation to the buyer, or you can have the corporation sell its assets to the buyer, leaving the corporate "shell" in your hands.

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Your After-Sale Role

It's a rare buyer who won't want you to show him or her the ropes, by remaining involved with the business for a while after the sale. Often the deal won't fly unless you agree to this. At a minimum, the buyer wants to be sure that the business is indeed a going concern. But beyond that, buyers realize that most of the real business knowledge has never been written down, and when you leave, it will go with you unless the new owner takes steps to learn it from you. Often a significant part of the total cash you receive will be tied to your future involvement in the business.

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Seller's Employment Contracts

When an employment contract is used in a business sale, the seller becomes an employee of the new owner. This is generally a short-term solution. Few entrepreneurs can successfully make the adjustment to taking orders as an employee once they've gotten used to calling all the shots in the business they used to own. Generally, the relationship sours and the seller leaves within a year to 18 months, sometimes causing the entire deal to unravel in the process.

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Seller's Consulting Contracts

When the buyer of a business is an unrelated third party, consulting agreements are used more frequently than employment agreements. Usually the buyer will agree to make specified payments at certain intervals of time, and the seller agrees to be available for consultation for a specified number of hours per month. The seller is to be "on call" and still gets the payments even if no services are required.

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Payment Terms: Escrows

If it seems likely that there are significant unknown liabilities associated with your business, the buyer may be willing to assume them if some part of the purchase price is placed in escrow. In an escrow arrangement, funds are placed in the hands of a neutral third party such as a bank, to be released to either party upon the happening of certain events. If problems surface within a specified time period, the buyer will get some or all of the money back. On the other hand, if nothing goes wrong, the money will be released to you at the end of the escrow period.

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Payment Terms: Stock as Payment

If one corporation sells out to another, it's often possible to structure the deal as a tax-free reorganization. This means that essentially no capital gains tax is due at the time of the sale, because each party is merely exchanging one type of security for another. The big catch is that you must agree to accept stock in the other company as virtually the only consideration for the sale. This is risky, but aside from structuring the deal as an installment sale, a reorganization is really the only way to push the capital gains on the sale of your company into the future.

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